07/07/2016 – Basics

When one reaches an advanced stage of professional practice it’s easy to forget the basics because they are no longer needed or have already been done by entry analysts for you. Although it’s not crucial that one should retain everything, it’s quite useful to reacquaint oneself with the fundamentals from time to time.

Here are some of the finance books I’ve been flipping through recently:

  1. Finance, by David Whitehurst – this textbook contains decent summary of capital risk, structure, financing methodologies, and some derivatives. It also includes some elementary financial planning and mergers&acquisitions which doesn’t have much substance but good as a light read on industry expectations.
  2. Introduction to the Economics and Mathematics of Financial Markets, by Jaksa Cvitanic and Fernando Zapatero – you have to expect some hardcore materials when one of the authors’ last name sounds Eastern European, and I’m expectantly trudging through it at a slower pace than the other books. Luckily I’ve encountered a lot of its notations when I was studying for actuarial exams so it’s been making it a bit easier to read. It touches on mainly portfolio modeling techniques, asset pricing, risk mitigation, and a bit on probability theory. The book dedicates two chapters exclusively for fixed income hedging and option pricing, signifying the amount of past research done for these two fields.
  3. Finance, by Zvi Bodie and Robert C. Merton – aha! Written by one of the Nobel Laureates who revolutionized the options pricing world and also crashed the world markets with the same idea, this book is surprisingly light in terms of difficulty…if it were in English. I’m reading this in Chinese (yes!) to A) get a deeper understanding on modern finance theory, and B) improve my Chinese. So far I’m checking google translate every 2 to 3 pages which is not too bad considering I haven’t yet used it in any professional capacity. The book actually doesn’t go too much into theories but looks at the markets as a whole from both a quantitative and qualitative perspective. The book looks at the evolution of financial markets, then delves deeper into its various components such as accounting, investing time frames, and valuation models. It’s one of the classic reads so I’d recommend it if you are interested in the topic (and perhaps read it in a language you are more adept in).

My GRE is coming up soon and I’m debating whether I should write the GMAT instead, dilemmas!

12/29/2015 – Investing

I’ve always read multiple books at the same time to prevent mental stagnation. Recently I have been reading two market related ones, The Intelligent Investor by Benjamin Graham and The New Market Wizards by Jack D. Schwagner. Both are great books and sheds light on different aspects of the market, the former is about how to intelligent allocate your capital for long term investing, and the latter is a summary of interviews with some of the top performing traders at the time of publishing (1992).

The biggest thing that both books agree on (with regards to how much I’ve read so far) seem to be that:
1) No one can consistently predict the stock market, and
2) Humans are ill-suited to handle themselves in the stock market

It’s important to note that The Intelligent Investor is a book that could benefit both investors/traders, and appeals to a large range of market participants. The Market Wizards series is great but it feels like Schwagner picked a biased subset of the trading world, or according to Nassim Taleb (author of the popular book The Black Swan), they were lucky. Alternatively, it could just mean that most people are too emotional to trade. This is an interesting phenomenon that has spawned countless behavioural finance courses and psychology studies.

I’ve been trading the stock market for fun since early 2013 with a small amount of capital (for me at that time), and during my short stint with the stock market I’ve always questioned whether it is better to invest for the long run or rack up a series of winning trades using leverage and options over a much shorter period of time. As a consequence my strategies were inconsistent and I wasn’t able to produce consistent wins. Due to the recent oil crisis my commodity related options were crushed and brought me to a point where I need to re-evaluate my goals or face eventual annihilation of my trading net worth. Luckily these options only consist of 20% of my high risk capital so much of my trading portfolio is still intact.

I’m currently educating myself on trading indicators so I could make more accurate directional assessments, with the eventual goal of building a probability based trading system with buy/sell signals. This process has been an interesting one, as much of the indicators use a combination of mathematics that feels quite artificial and closer to a computer programming experience than statistics or abstract mathematics. I will update any research efforts as they become available.